Krugman’s blog, 12/2/15

There was one post yesterday, “Multiplier Evidence and Multiplier Denial:”

One of the overwhelming lessons of the post-2008 crisis has been that fiscal multipliers are large when monetary policy can’t offset the effects of spending cuts — which is what basic macroeconomics told us should be true, and is. But it’s a lesson many people don’t want to learn, and there’s very obviously a market for papers that claim to undermine that evidence.

The latest entry is Mohlman and Suyker, claiming that when you look at a longer period the influential Blanchard-Leigh results showing large multipliers don’t hold. Brad DeLong quickly notedthat what they actually show is that in 2013-14 and 2014-15 there is very little power in the data, which is by no means the same as showing that the multiplier was small.

But there’s a deeper issue here, which gets to the reason European experience has been so useful for clarifying our understanding of fiscal policy.

The big problem with empirical work on fiscal policy has always been that you rarely get anything resembling a natural experiment. Really big changes in fiscal stance come rarely, and are usually associated with wars, when other things like rationing also tend to happen. And the coincidence of big fiscal shifts with constrained monetary policy is a once-in-three-generations story.

But Europe after 2009 provided something that, while not a perfect natural experiment, was much closer than anything we’re likely to see for a long time. Austerity mania, enforced on countries that had no freedom of maneuver because they were on the euro, led to drastic fiscal tightening in some but not all euro area economies; these big shifts gave us a pretty good view, certainly by historical standards, of what such shifts do.

But this natural sort-of experiment was time-limited. Here’s the euro area cyclically adjusted primary balance over time:


IMF Fiscal Monitor

The big move toward austerity took place between 2010 and 2013 (with Greece starting earlier). There hasn’t been any consistent move toward either tightening or loosening since then. So of coursethere’s very little power in estimates from 2013-14 and 2014-15: there wasn’t much going on, so that whatever changes we see in measured structural balances are probably as much measurement error as they are anything real (which also implies that the coefficients are biased downwards.)

So what do we learn from estimates that show big multipliers from 2009 to 2013 but are overwhelmed by noise thereafter? Nothing, except that the researchers aren’t thinking about what was going on.

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